Navigating Section 2 of the Sherman Act can be treacherous for in-house counsel. Every contract, meeting, and email can come under scrutiny for alleged “uncompetitive” behavior. This is especially true for highly competitive and successful companies. In this article, we will delve into why in-house lawyers need to be acutely aware of Section 2, particularly as their company grows.
Unlike Section 1 of the Sherman Act, which deals with agreements, Section 2 focuses on unilateral action. According to US courts, Section 2 requires two elements: possessing monopoly power in the relevant market and willfully acquiring or maintaining that monopoly power. This means that once your company crosses the 50% market share threshold, competitors, customers, and government regulators can start causing trouble. Ironically, actions taken by your company when it was small can become significant problems later on. Defending against antitrust lawsuits is not only expensive but can also result in triple damages and attorneys’ fees if found guilty.
Understanding Relevant Market and Monopoly Power
To establish Section 2 liability, your company needs to have a “monopoly” in a “relevant market.” A relevant market refers to all products in a specific geographic region that compete or could potentially compete with your products. It is crucial to have many substitutes in the market to avoid being considered a monopolist. Once a relevant market is defined, the next step is to determine if any of the competitors, including your company, hold monopoly power. Monopoly power is the ability to exclude competition or raise prices without facing any negative consequences. Regulators define it as the ability to raise prices by 5% and maintain that level without losing sales. Market share in the relevant market is also an indicator of monopoly power; having over 70% market share is likely to be considered monopolistic, while less than 50% is generally not. Market share between 50% and 70% falls into a gray area, but it is important to note that market share is not definitive proof, particularly if there are barriers preventing competitors from entering the market.
Exclusionary Conduct and Potential Pitfalls
Contrary to common belief, having a monopoly is not inherently illegal or bad. It is perfectly legal for a company to have a monopoly if it is achieved through superior products, business acumen, or historical accident. The problem arises when a monopolist tries to obtain or maintain a monopoly position through exclusionary conduct. The challenge lies in the lack of clear lines defining what crosses into anticompetitive territory. The following behaviors can potentially raise antitrust risks for your company if it is a monopolist:
- Refusing to engage in business dealings
- Implementing Most Favored Nations (MFN) clauses
- Establishing exclusive dealing contracts
- Offering loyalty discounts
- Denying access to competitors
- Engaging in predatory pricing (selling below costs)
- Engaging in a pattern of “bad” behavior that, taken together, creates a monopoly stew
Once your company surpasses the 50% market share threshold, it is crucial for in-house counsel to evaluate whether the potential problems arising from these behaviors outweigh their benefits.
Defending Against Section 2 Complaints
For a Section 2 complaint to succeed, the plaintiff must have suffered an “antitrust injury” protected by the Sherman Act. Your company can defend against allegations of anti-competitive behavior by establishing a pro-competitive or pro-business rationale. For instance, your decision to cease doing business with a competitor may be justified if they are exploiting your brand or technology to the detriment of your business. It is essential to demonstrate that your company competes on the merits and has legitimate business reasons behind its actions. As in-house counsel, your role is to ensure that the business operates with a genuine business need in mind, such as enhancing efficiency, promoting competition within the brand, preventing free-riding, providing superior customer service, increasing output, and delivering high-quality products and services.
In-House Counsel’s Role and Precautionary Measures
Once your company’s market share exceeds 50%, it becomes crucial to educate the business about the potential for heightened scrutiny and the need for more thoughtful business practices. In-house counsel should consider the following precautionary measures as part of their antitrust compliance program:
- Avoid defining markets: Be cautious of documents and emails from your colleagues attempting to define the market for your products.
- Promote rational behavior: Discourage statements that boast about crushing competitors or raising prices aggressively, as they may be used against your company in a Section 2 claim.
- Emphasize business justification: Encourage the business to focus on legitimate business reasons rather than language that could imply anti-competitive motives.
- Stay vigilant: Constantly be on the lookout for proposals that could potentially violate antitrust laws, especially those that harm competitors through exclusionary or predatory actions.
By providing training on the scope of single-conduct Sherman Act Section 2 offenses, in-house counsel can help prevent any missteps. It is far easier to prevent issues from arising in the first place than to fix them after the fact.
In conclusion, Section 2 of the Sherman Act presents substantial challenges for companies with significant market shares. Understanding the concept of a relevant market, identifying monopoly power, and avoiding exclusionary conduct are crucial for compliance. In-house counsel plays a vital role in educating the business, promoting rational behavior, and safeguarding against potential legal troubles. By following these guidelines, your company can navigate the complexities of Section 2 more effectively.
To learn more about antitrust law and how it can affect your business, visit Garrity Traina.